How will the credit crisis affect protection sales?
Hands up, whoever thinks the country is not marching straight into a recession? Okay, if any of you just raised your palms, then I will ask you to kindly go to the back of the class because it is obvious that you have not been paying attention recently.
Just look at some recent headlines in the news:
- On the 22 August, the Office of National Statistics said economic growth in the UK ground to a complete halt between April and June, contradicting their original estimate of a +0.2% increase.
- On the 18 August, the British Chambers of Commerce (BCC) predicted that the defining characteristic over the next six-to-nine-months, for UK banks, was going to be "a difficult and risky climate". Despite ruling out a major recession, the institution foresaw UK growth as stagnating or being slightly negative. The prospects, it said, could be much worse if interest rates were not reduced in the near future. Not only that but the unemployment rate is said by the BCC to increase to over 2 million for the first time since Labour came to power in 1997.
On the protection side, there has been somewhat mixed news: the total new premiums for Income Protection (IP) remained fairly steady, according to Association of British Insurers (ABI) figures, with sales of £14m in the first two quarters of this year as opposed to a range of £12-14m last year. But one item, directly below, which should cause concern for the protection industry is the revelation that sales of the stand-alone critical illness (CI) product have been decimated in the first six months of 2008: from a range of £9-11m a quarter in 2007, the first two quarters saw CI premiums falls to £4m - very bad news.
The ABI said the fall was due to the downturn in mortgages being taken out, since most CI is sold on the back of a mortgage. There is no argument with that reasoning as it has been expected that an economic downturn will adversely affect some protection products.
So should advisers be wary of what is coming? The answer to that should be yes. When times are tight, consumers will look for ways to ease the burden on their day-to-day existence. Often, as COVER has reported many times before, that means that protection will be stripped-down or cancelled.
A key story in the media so far this year has been the horrendous rises in the price of food, including, quite bizarrely, lemons which at one point this year seemed to triple in price. Recent figures collated by uSwitch show how much household bills have shot up by since last year: gas has gone up by 28.3%, electricity by 20%, food and drink by 24.9% and mortgages by 6.2%. On average, total household bills have increased by 7.7% this year, much higher than the rate of inflation. Included in this figure is insurance with building insurance said to have increased by 4.5%, car insurance by 5.7% and contents insurance by 24%. Considering how low protection is considered by the general public, would anyone like to raise their hand and say they would be surprised if the number of people with protection dropped?
